What happened last time?
In between 2007 and 2010, I was working at the heart of the Treasury’s budget policy and coordination team as head of the Finance Bill team – the team which was responsible for preparing and managing the tax legislation that underpinned the Budget. In this capacity I was also responsible for coordinating policy work across tax avoidance and personal tax. In total, I delivered four different Finance Bills for two Chancellors. 2010 was a bumper year – there were three Bills that year. I advised on all of them, but in the event only managed the Parliamentary process of the first two – the final Finance Bill of the Labour Government and the ‘Emergency’ Finance Bill which followed Osborne’s first ‘Emergency’ Budget.
Fiscal loosening – followed by dramatic tightening
My first Finance Bill was in 2008 – a more innocent age. We were on the edge of the crisis and there was an awareness that things might become “rocky”. Yet there was no real appreciation of how serious things would become and fiscal policy making continued unaltered. The big policies in that Finance Bill were the reform and reduction of Capital Gains Tax (CGT) to a flat rate of 18% (subject to entrepreneur’s relief) and an immensely complicated reform of the rules around whether an individual is resident or domiciled in the UK for tax purposes. The latter was very much a feature of Gordon Brown’s way of doing politics – making a totemic change in large part for positioning purposes, with little attention subsequently paid to the practicalities.
From then on the financial crisis hung over all policymaking. At the end of 2008, the rate of VAT was dropped from 17.5% to 15%, where it stayed until the end of 2009 – an economic stimulus which cost the Treasury roughly £1bn a month in what we at the time thought was a huge giveaway. These numbers seem trifling now.
In 2009 the Government announced the creation of the Additional Rate of income tax, the 50p rate, to be paid by those earning over £150,000, and that the income tax personal allowance would be phased out for those earning over. Those were both included in the final Finance Bill of the Labour Government – further Brownian dividing lines, and (pretty obvious) traps for George Osborne, who, as Shadow Chancellor, would have to agree to their passage to facilitate the swift wrapping up of the legislative agenda before the election. (In the event, Osborne, a far more subtle politician, simply did not engage, let the legislation through virtually unamended, and then blamed Gordon Brown for it.)
In the run up to the 2010 election, Cameron and Osborne had managed to pin the blame for the melt-down in the public finances on Labour in general and Gordon Brown specifically. They weaponised Brown’s alleged failure to manage the public finances – and this set the scene for Osborne’s first ‘Emergency’ Budget, on 22 June 2010.
That Budget framed what would come next – in particular, that Autumn’s Comprehensive Spending Review ushering in an unparalleled nearly 10 years of real-terms spending cuts. It also brought tax rises – with the main rates on VAT and Insurance Premium Tax both increased to 20% and the main rate of Capital Gains Tax to 28%. Yet these tax cuts were by some way outweighed by tax rises – and the money raised in tax was itself dwarfed by the sums removed from the public spending in subsequent years.
On the basis that a starting point for any response to a situation is to look back and see what was considered last time, the following lessons can be drawn:
- Retrenchment is coming;
- But not yet.
- Likely fiscal stimulus.
- Combined with political positioning plays.
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First published in our weekly Political Capital newsletter
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